Saturday, February 18, 2012

U.S. Manufacturing Is Open for Business and Doing Well; Despite, Not Because of, Government Policy

"Manufacturing is not the basket case of political lore, and America really is still "making things." There's another, subtler myth too—that this industrial decline is inevitable, by economic determinism or business mistakes. That's some of it, but the truth is that America would probably be making many more things if not for bad but deliberate political choices.

The manufacturing crisis, if that's the word, has been jobs. Industry employed one of three workers after the war. Today, it's one of eight. Yet this, too, is largely a measure of economic progress—because it is the result of productivity gains. Productivity is the basic measure of how much we can do with our resources, human and monetary, and increasing it is what drives wage gains and higher standards of living.

Real manufacturing output stood at about $35,000 per worker in 1947, in constant dollars. It doubled by 1980 as companies became more efficient. Today this measure is an astonishing $150,000 (see chart above). Manufacturing productivity has increased by 103% since the late 1980s, outpacing every other industry and double the 53% in the larger business economy.

This translates to gains for consumers: Prices for manufactured goods have declined 3% since the 1990s, even as overall prices rose 33%. One reason manufacturing is shrinking as a share of GDP is that its costs are falling—unlike, say, in health care, with its negative productivity rate in the official statistics.

U.S. manufacturing has problems, but it is strong enough to succeed both at home and abroad merely with reforms that all companies ought to enjoy: a corporate tax code with lower rates and fewer loopholes that is competitive with the rest of the world; fewer regulatory hobbles; an education system that better prepares the work force with 21st-century skills; an immigration policy that invites the world's brightest.

This election-year debate will be more constructive if it is less about how to help manufacturers and more about how to fix government."

21 Comments:

At 2/18/2012 2:17 PM, OpenID Sprewell said...

Who's talking about helping manufacturers? The only one is Santorum and he has no chance in hell of being elected. Romney is not dumb enough to fall for that crap about helping manufacturing; in fact, I was pleasantly surprised that he's the only Republican candidate who talks about GDP per capita comparisons between the US and Europe, like the ones featured on this blog many times. Even Ron Paul, probably the most versed in economics of the bunch, doesn't cite stats like that. As for the manufacturing productivity stats charted above, that's fantastic, but most people don't care about that when they're losing their jobs and the information/service economy isn't expanding fast enough to absorb them.

The fundamental problem of this recession is that the tech/information people are just capable enough to obsolete a lot of older businesses and advise low-value manufacturers to move offshore but they're fairly incapable of coming up with new information/service work to replace the jobs that are gone. As a result, we have a recession and it will stay this way until the tech/information people figure it out. I've said many times that the solution is micropayments but most are too dumb to realize that, so we're mired in stagnation till that changes.

 
At 2/18/2012 2:29 PM, Blogger PeakTrader said...

Sprewell says: "...Ron Paul, probably the most versed in economics of the bunch."

Plato understood economics more than Paul.

 
At 2/18/2012 3:06 PM, Blogger Benjamin said...

Given how well the private-sector works, isn't it time we wean Pinko-America---that is, farmers--off the federal teat?

 
At 2/18/2012 4:10 PM, OpenID Sprewell said...

Peak, you don't cite a simple example to back up your silly insult, because you know you cannot back it up. :)

 
At 2/18/2012 7:26 PM, Blogger kmg said...

What is interesting is that this metric never really declined, but has just kept on shooting up.

The problem is, the denominator is shrinking, with fewer and fewer workers dividing up the same pie.

China will experience the same. When Foxconn automates out 200,000 workers, the output per remaining worker will appear to have risen.

Eventually the US will have one manufacturing worker remaining, and his output will be $3 Trillion.

 
At 2/18/2012 7:36 PM, Blogger Ron H. said...

Sprewell: "Peak, you don't cite a simple example to back up your silly insult, because you know you cannot back it up. :)"

Well, Plato was a pioneer in the concept of the division of labor, but I don't think Ron Paul is having any trouble with it.

I think Peak's problem with Ron Paul is that he's not a Keynesian.

 
At 2/18/2012 9:27 PM, Blogger sethstorm said...

Business might be doing well, but what matters are the workers. They're getting the short end of the stick, in a fear-driven market. Said fear is not from any part of competence, but from businesses getting too much power.

 
At 2/18/2012 9:29 PM, Blogger sethstorm said...


The problem is, the denominator is shrinking, with fewer and fewer workers dividing up the same pie.

Which results in a larger problem with workers that are caught on the wrong side of the transition, while businesses are always excused to demand things without something given in kind towards workers.

 
At 2/18/2012 9:32 PM, Blogger PeakTrader said...

Ron Paul wants to abolish the Fed and go back to the gold standard.

He has even less understanding of a real economy (reflected in living standards) than a paper economy.

 
At 2/18/2012 10:10 PM, Blogger Hydra said...

Except that some of the highest dollar items are not for sale to consumers. They add to the dollar value of production, but make little difference in the life of the Average Joe.

 
At 2/18/2012 10:15 PM, Blogger Hydra said...

Kmg: these fine gents laughed at me when I said that.

 
At 2/18/2012 10:23 PM, Blogger Hydra said...

Except that some of the highest dollar items are not for sale to consumers. They add to the dollar value of production, but make little difference in the life of the Average Joe.

 
At 2/19/2012 12:11 AM, OpenID Sprewell said...

Peak, I agree that Ron Paul's support for the gold standard is misguided, but other than an exception or two like that, he's as good as it gets, particularly for a politician. I will agree that the biggest weakness of Paul and his supporters is their old-fashioned obsession with the Fed and the gold standard.

 
At 2/19/2012 8:18 AM, Blogger Jon Murphy said...

Funny thing. I came across an old Forbes article from the 1930's. It was saying the exact same "fears" being said here by Hydra et al. It wasn't about manufacturing, though. I was about farming. The article talked about the decline of farming, long-run high unemployment, etc and all. Wasn't true then, isn't true now.

 
At 2/19/2012 8:20 AM, Blogger Jon Murphy said...

Who's talking about helping manufacturers? The only one is Santorum and he has no chance in hell of being elected. Romney is not dumb enough to fall for that crap about helping manufacturing;

In the State of the Union, President Obama talked about manufacturing's decline and how we need tax credits and subsidies to support manufacturing. Mr. Romney has constantly been harping on China as a currency manipulator, taking away US manufacturing jobs, and how they need to be punished for it. Ditto with Santorum and Gingrich. Paul has, for the most part, kept his nose clean on this particular issue.

 
At 2/19/2012 8:28 AM, Blogger Mark J. Perry said...

Jon Murphy: Is that Forbes article available online? I would be interested in reading it if you could send a link (mjperry at umich.edu), or you can post in the comments section.

Thanks, Mark

 
At 2/19/2012 11:31 AM, Blogger morganovich said...

worth noting:

the big acceleration in "real output" in the 90's coincides with the change in CPI methodology.

if you alter CPI to read lower, productivity looks higher for any given set of underlying economic realities.

if you normalize the inflation measure (either way) this "productivity miracle" is greatly lessened.

no doubt that productivity is up, but using a common measure, the big increase in slope disappears.

 
At 2/19/2012 12:39 PM, Blogger Mark J. Perry said...

Real manufacturing output is calculated using the GDP deflator, NOT the CPI.

 
At 2/19/2012 12:54 PM, Blogger Jon Murphy said...

Dr. Perry,

I came across the article at work (we have a whole bunch of old Forbes magazines from the 30's). I'll do my best to find you a link, but no promises.

 
At 2/19/2012 1:00 PM, Blogger Mark J. Perry said...

Jon:

Thanks, even if it's not available online, if you have the name of the article, author, and/or the date of the issue would be helpful.

Mark

 
At 2/19/2012 1:10 PM, Blogger Jon Murphy said...

Dr. Perry,

I will email you that information tomorrow.

 

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